Contributing editor Glenn Rogers is here this week with a new investing idea. Glenn does a lot of travelling, both business and personal, frequently crisscrossing North America and the Atlantic. So he has a lot of first-hand experience with airlines, hotels, travel websites, etc. This week he tells us about a hotel stock that he thinks offers great growth potential in the current environment. Glenn is a successful businessman, entrepreneur, and investor who has worked in both Canada and the U.S. He and his family live in southern California. Over to him.

Glenn Rogers writes:

Regular readers of this column will know that I'm particularly bullish on the travel industry in general. One reason for this is that I see the demographics of North America pointing to increasingly more travel as the baby boomers continue to retire and spend more time on the road. Combine this trend with emerging nations travel, particularly from China, that is likely to burgeon over the next several years and the travel industry looks poised to benefit substantially. This is not only leisure travel. Business travelers will also help fuel the growth in travel-related industries for some time to come.

These trends combined with the brutal weather most of Canada is experiencing this year should be pushing people on to airplanes and getting as far south as they can so they can enjoy a brief respite from the never-ending cold and snow. I'm writing this column in California so I feel a little guilty bringing this up but as soon as they stop canceling flights I think the southern travel business should pick up.

There are lots of ways to get involved with the travel business and we have mentioned some of them in this space including the airlines, Boeing (NYSE:BA), Trip Advisor (NASDAQ:TRIP), Yelp (YELP), Orbitz (NYSE:OWW) and others. But this month I thought I'd focus on one of the major hotel companies, many of which will benefit from the travel boom. I considered Hilton (NYSE: HLT), which went public just last year, but I think the shares are expensive and it became clear that the profits are coming from a small number of locations and that many of their properties are not doing well.

There are plenty of choices in the publicly traded hotel sector but one I particularly like is Wyndham Worldwide (NYSE:WYN). The nice thing about Wyndham is that it is active in three segments of the lodging business. The first segment is traditional hotels where the company operates a number of brands that will be familiar to readers, starting with the Wyndham Hotel and Resort group, which serve a higher-end clientele. The company also owns brands like Ramada, Days Inn, Super 8, and Howard Johnson, which serve travelers with more modest budgets. Domestically, this group comprises nearly 10% of the U.S. hotel room supply. All in all they manage nearly 7,500 hotels worldwide and sold more than 120 million room nights in 2013.

The second segment is the Wyndham Exchange and Rental group. This operates through their various brands, with over 100,000 vacation properties in 100 countries, with the best-known brand name being RCI. These properties are different from traditional hotel rooms in that they may include city apartments, residence clubs, yachts, etc. They have 3.7 million subscribing members who are able to use various types of accommodations to suit their needs. This is a very profitable segment for the company.

Their third group is Wyndham Vacation Ownership, which most of us would know as timeshare. Timeshares have a bad name with some people but if you stick with the reputable brands like Wyndham they can make sense for a large number of travelers who like going back to the same place each year but don't want the hassles of ownership. Wyndam has sold more than 23,000 units to 900,000 families over the past several years. Apparently about 80% of the buyers acquire additional weeks after their initial purchase so it would appear that the satisfaction level is quite high. Interestingly, this area appears to be recession proof to some degree and did not suffer to the extent you would have expected during the recent downturn. Evidently, people give up a lot of things before they will give up their timeshare.

All this activity has led to a very profitable business. The company recently reported fourth-quarter results that showed an increase of 16% in their earnings per share compared with the same period in 2012. Fourth-quarter revenues were $1.2 billion (figures in U.S. dollars), which is an increase of 9% from the prior year. Those results reflected growth across all the company's business segments and made this the fourth consecutive year of double-digit growth in adjusted earnings per share.

Full-year results for 2013 showed revenues of $5 billion, an increase of 10% over the prior year. Net income for the full year was $515 million compared with $469 million the prior year. The company repurchased 7% of their own shares during the same period.

Wyndham is predicting modest but stable growth for 2014. The company also authorized a 20% increase in the quarterly dividend from $0.29 to $0.35 per share. This raises the company's annual pay out to $1.40 per share, which works out to a yield of 2% at the current price.

To sum up, I like the travel segment and I particularly like Wyndham.

Action now: Buy with a target of $90. The shares closed on Friday at $69.96.

GLENN ROGERS’S UPDATES

Originally recommended on April 18/11 (#21115) at $44.13. Closed Friday at $80.89. (All figures in U.S. dollars.)

In keeping with our hotel theme this month, Gordon suggested I update Las Vegas Sands. This has been a great pick for us, nearly doubling from $44.13 since we recommended it in April 2011 to $80.89 where closed on Friday. I just returned from Vegas and I'm happy to report that the lines are long for taxis, the casinos are hopping, and generally the town seems to be doing very well. There's no new construction underway, which is good since they have a lot of housing and hotel room inventory to soak up. Doubtless they will start building again once the memory of the meltdown has faded but for now it looks like things are going well in Las Vegas.

Of course, Las Vegas Sands Corp. is as much about China as it is about its namesake city and things seem to be going well for them over there as well. Fourth-quarter results issued Jan. 29 showed that strong gaming volumes in Macao drove EBITDA up 55.8%. For the year, net revenue increased 23.7% and EBITDA increased by 25.6% to a record $4.76 billion. Net income was up 51.3% to $2.3 billion ($2.79 per share). The company paid dividends of $1.40 per share over the year and repurchased $570.5 million worth of stock as part of their $2 billion stock repurchase program.

Originally recommended on Sept. 19/11 (#21134) at $39.20. Closed Friday at $72.56. (All figures in U.S. dollars.)

Starbucks has been another solid choice for us since we recommended it in September 2011 when the stock was trading at $39.20. The shares rose to a high of $82.50 before falling back during the last few months, closing Friday at $72.56 for nice gain of 85%.

The company's results in 2013 were strong especially given the sheer size of the business. Consolidated revenues reached a record of $14.9 billion, which was a 12% increase over the previous year. Same-store sales rose 7% and they opened over 1,700 new stores around the world. Earnings per share were up 26% and the company continued to pay dividends and repurchase its own shares, which returned over $1 billion worth of cash to shareholders.

Additionally, the company continues to move into new areas and innovate by opening stores that focus on tea, juices, and upscale bakery products. It's likely input costs will rise and we have seen coffee prices increasing but the strength of the brand and the company's continued ability to expand globally and innovate new products should keep it moving forward. I think the pullback the stock has had over the last few months is a buying opportunity.

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